Money-Back Guarantees in Individual Retirement Accounts: Still a Good Deal?

Abstract

In the wake of the financial crisis and continued volatility in international capital markets, there is growing interest in mechanisms that can protect people against retirement account volatility. This paper explores the consequences for savers' wellbeing of implementing market-based retirement account guarantees, using a life cycle consumption and portfolio choice model where investors have access to stocks, bonds, and tax-qualified retirement accounts. We evaluate the case of German Riester plans adopted in 2002, an individual retirement account produce that includes embedded mandatory money-back guarantees. These guarantees influenced participant consumption, saving, and investment behavior in the higher interest rate environment of that era, and they have even larger impacts in a low-return world such as the present. Importantly, we conclude that abandoning these guarantees could enhance old-age consumption for over 80% of retirees, particularly lower earners, without harming consumption during the accumulation phase. Our results are of general interest for other countries implementing default investment options in individual retirement accounts, such as the U.S. 401(k) defined contribution plans and the Pan European Pension Product (PEPP) recently launched by the European Parliament.

Saving for retirement in Europe: the long-term risk-return tradeoff

“…The result of our simulation study is that both life-cycle target-date fund strategies and minimum guarantee strategies provide satisfactory capital protection, but life-cycle strategies offer protection at lower costs. In this respect, our results are consistent with recent empirical evidence in Horneff et al (2019a), Koijen and Yogo (2022), and Milevsky and Salisbury (2022).…”

Financial Literacy and Financial Behavior at Older Ages

“…Nevertheless, not all insured products are necessarily cost-effective. For example, Horneff et al (2019) show that money-back guarantees on pension contributions are extraordinarily expensive in this time of low capital market returns.…”

Пенсійна Система України На Сучасному Етапі: Проблеми Та Шляхи Їх Вирішення

“…Порівняльним аналізом систем приватного пенсійного забезпечення різних країн, зокрема Австралії, Великобританії та США і їхнього впливу на економічну стабільність присвячено праці N. Fabian, M. Homanen, N. Pedersen та M. Slebos [12]. Питання гарантування повернення коштів на індивідуальних пенсійних рахунках і збалансованій інвестиційній політиці накопичувальних фондів висвітлено в роботах V. Horneff, D. Liebler, R. Maurer, O. S. Mitchell [13]. Заслуговують на особливу увагу праці D. M. Muir та J.…”